02-STRAMAN (What and Why of Strategy)

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WHAT IS STRATEGY AND WHY IS IT IMPORTANT?

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Strategy’s Three Central Questions

Where are we now? Current financial performance

Market standing

Competitive resources and capabilities

Changing industry conditions

Where do we want to go from here? What buyer needs to try to satisfy?

Which growth opportunities to emphasize?

How to change the business makeup?

How are we going to get there? Which competitive moves and business

approaches to use as a strategy?

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What Do We Mean By Strategy?

A firm’s strategy is all about how: How to attract and please customers.

How to compete against rivals.

How to position the firm in the marketplace to capitalize on attractive growth opportunities.

How best to respond to changing economic and market conditions.

How to manage each functional piece of the business.

How to achieve the firm’s performance targets.

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FIGURE 1.1 Elements of a Company’s Strategy

Core Concept

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A company’s strategy consists of the competitive moves and business approaches management has developed to attract and please customers, compete successfully, capitalize on opportunities to grow the business, respond to changing market conditions, conduct operations, and achieve performance objectives.

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Strategy and the Quest forCompetitive Advantage

Gaining a sustainable competitive advantage requires: Choosing to compete differently by

doing what rivals don’t do or can’t do.

Appealing to buyers in ways that set the firm apart from its rivals.

Staking out a market position that is not crowded with strong rivals.

Core Concept

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A firm achieves sustainable competitive advantage when an attractively large number of buyers develop a durable preference for its products or services over the offerings of competitors, despite the efforts of competitors to overcome or erode its advantage.

Concept to Action

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Mimicking the strategies of successful industry rivals—with either copycat product offerings or efforts to stake out the same market position—rarely works.

A creative, distinctive strategy that sets a firm apart from rivals and yields a competitive advantage is a firm’s most reliable ticket for earning above-average profits.

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Choosing a Strategic Approach

low-cost provider

broad differentiation

focused low-cost

focused differentiation

best-cost provider

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Why Strategy Evolves Over Time

A strategy changes over time as: Competitors make unexpected moves

The needs and preferences of buyers change

New market opportunities emerge

Managers develop new ideas to improve the strategy

Evidence mounts that the strategy is not working well

A strategy evolves: Incrementally or dramatically

Proactively and adaptively

Concept to Action

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Changing circumstances and ongoing management efforts to improve the strategy cause a company’s strategy to evolve over time—a condition that makes the task of crafting a strategy a work in progress, not a onetime event.

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FIGURE 1.2 A Company’s Strategy Is a Blend of Planned Initiatives and Unplanned Reactive Adjustments

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The Relationship Between a Firm’s Strategy and Its Business Model

Business Model Management’s blueprint for delivering a product or

service to customers that will generate revenues sufficient to cover costs and yield an attractive profit.

Business Model Elements The firm’s customer value proposition for satisfying

buyer wants and needs at a perceived good value.

The firm’s profit formula sets out how the firm’s cost structure will allow for acceptable profits given the pricing tied to its customer value proposition.

Core Concept

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A firm’s business model sets forth how its strategy and operating approaches will create value for customers, while at the same time generate ample revenues to cover costs and realize a profit. The two elements of a firm’s business model are (1) its customer value proposition and (2) its profit formula.

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Netflix And Redbox: Two Contrasting Business Models

Netflix Redbox

Value Proposition

Convenient delivery of movies to customers’ mailboxes or streamed to their PCs, Macs, or TVs.

Economical 24-hour movie rentals and purchases that could be picked up at conveniently located DVD kiosks.

Profit Formula

Revenue Generation: Monthly subscription fees from millions of subscribers

Cost structure: Fixed and variable costs associated with DVD acquisitions, licensing fees and revenue sharing agreements, development of movie selection software, website operation and maintenance, Internet streaming capabilities, distribution center operations, and administrative activities.

Profit Margin: Netflix’s profitability was dependent on attracting a sufficiently large number of subscribers to cover its costs and provide for attractive profits.

Revenue Generation: Customers could rent DVDs and purchase DVDs from Redbox’s DVD vending machine kiosks.

Cost Structure: Fixed and variable costs associated with the kiosk purchases and deployment, DVD acquisitions, licensing fees and revenue sharing agreements, website operation and maintenance, kiosk stocking, and administrative activities.

Profit Margin: Redbox’s profitability was dependent on generating sufficient revenues from DVD rentals and sales to cover costs and provide for a healthy bottom line.

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The Three Tests of a Winning Strategy

Fit

Performance

Competitive Advantage

Is the firm achieving sustainable competitive advantage?

Is the strategy producing good company performance?

How well does the strategy fit the firm’s situation?

Concept to Action

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A winning strategy must fit the firm’s external and internal situation, build sustainable competitive advantage, and improve company performance.

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Measuring the Caliber of a Firm’s Strategy

Is the strategy producing good performance? Is the firm gaining in profitability

and financial strength? Is the firm gaining in competitive strength

and market standing?

Assessing current and proposed strategies: Do they have good fit? Do they offer a sustainable competitive advantage? Are they capable of contributing to above-average

performance or performance improvements?

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The Road Ahead

Strategy is about asking and answering a most important question: What must managers do, and do well, to make

a company a winner in the marketplace?

The answer is that doing a good job of managing requires good strategic thinking and good management of the strategy-making, strategy-executing process.

Best wishes for your success in the class!!